Question

Suppose there are two forest plots (1 and 2). The plots are identical in every respect except the following. On plot 1, the trees will be harvested and sold and then the land will be left idle. On plot 2 the land will be cleared following the harvest and then the land will be converted into a farm.

Suppose the only benefit provided by the forest is marketable timber. In terms of economic efficiency, which plot should be harvested first? Why? You should support your answer either mathematically or graphically.

Answer 1

Suppose there are two forest plots (1 and 2). The plots are identical in every respect except that on plot 1, the trees will be harvested and sold and then the land will be left idle. On plot 2 the land will be cleared following the harvest and then the land will be converted into a farm.

If the only benefit provided by the forest is marketable timber. So in terms of economic efficiency, Plot 2 should be harvested first.

This is because as plot 1 will be left idle after harvest so it will be of no use after that and the tree is harvested early it will gererare less revenue say $100,000. But if it is harvested 5 years after plot 2. At this time trees must have grown larger and thicker and the price will also be higher because of less supply, so it may generate a higher revenue say $150,000.

If Plot 2 will be harvested first it will generate a revenue less than plot 1 say $80,000. But again it can be used for farming and can generate revenue of $20,000 per year from farm. So in next five years its total revenue would be $80,000 + $20,000×5 = $180,000

So it is proved mathematically that the overall revenue and hence efficiency will be higher if plot 2 is harvested first and than plot 1.